On the concept of transition.

Colombatto, Enrico

This article reassesses the meaning of transition. After a critical review of the traditional approach, it is argued that meaningful transition requires emphasis on the change of the institutional path-dependent process. In this light, the issue of transition may also apply to the West. Put differently, the notion of transition is here referred to a broader context than that acknowledged by the orthodox view and now includes the dynamics of power, the attitude toward risk and uncertainty within a civilization, and ideology. It is maintained that changes depend heavily on the opportunities for rent seeking, which may be enhanced or stifled by technological progress or other exogenous events.

Introduction

The economics of transition was born out of the collapse of the Communist regime in Eastern Europe. This collapse is probably due to two reasons. First, it was not politically suitable to call East-European economies by their real name-developing or undeveloped countries. That would have been at odds with the political objectives of making the former Communist countries feel treated as equals by the Western community and of preventing possible nationalistic tensions in that part of the world. Second, a new name had to be coined to justify policies that proved rather ineffective in the Third World experience but were proposed once again--sometimes in different versions--in the East-European context. One may thus wonder whether the economics of transition makes any sense at all, or whether its usefulness may be better perceived from other perspectives.

The purpose of this article is to suggest an answer to such questions. In particular, sections 1 and 2 review the orthodox approaches to transition and some efforts to meet their shortcomings. Sections 3 and 4 reformulate the scope for a theory of transition to developed countries and reassess the legitimacy and rationale of governmental economic intervention in the Western world. The key element of this reappraisal is summed up in section 5, where a new concept of transition is put forward, focused on the individual rather than on a society or a country.

The Classical Approach

From the classical viewpoint, the issue of transition is closely connected with that of growth. In particular, the classical school emphasized the static technical features of economic systems. Trade and labor specialization, together with higher capital endowment and improved (maritime) transportation, (1) were rightly considered conducive to growth and higher living standards. Since the economics of technological progress played a secondary role or no role at all, it is plausible to claim that the classical school ignored two crucial elements: the possibility of changing production functions through the acquisition of knowledge and the influence of institutions on transaction costs.

As a consequence, the classical case for transition implies a strong plea in favor of free trade, limited governmental intervention, and--especially in the case of poor countries--foreign aid to enhance capital formation. Put differently, classical transition refers to countries that move out of mercantilist practices, as well as to those in critical need of better infrastructure (e.g., railways in the Western world during the second half of the nineteenth century). From a normative perspective, the classical school, therefore, spells out the desirable policies to enhance growth in relatively poor countries, (2) whereas, from a positive standpoint, classical transition applies to a country that complies with the appropriate set of sound economic rules but has not yet secured the full benefits they are supposed to generate. In this light, countries are simply classified as those who are on their way toward their potential consumption-possibility frontier and those who are not; that is, as those that grow; those that do not grow because the minimum requirements for growth have not been attained; (3) and those that have already achieved maturity and no longer expand. In a nutshell, classical transition theory turns out to be the analysis of the minimum conditions for growth and of how they can be obtained.

The Neoclassical View

Neoclassical economics has surely led to major analytical results and has allowed scholars to study in sophisticated detail the features of the allegedly perfect machine known to some as the "Nirvana" economy. The cultural and institutional incentives that drive individual behavior, however, have been, by and large, overlooked. Similar to the classical teaching, neoclassical modeling describes a static world where exogenous transaction costs prevent it from functioning flawlessly. Time and learning play a limited role and so does institutional dynamics. As suggested by Hodgson, (4) it is no coincidence that neoclassical economics is cherished throughout the political spectrum.

The neoclassical perception of transition thus remains inadequate. A transition economy is still perceived as a machine that for some reasons--ignorance or market imperfections--runs below its full potential. Developed and developing economies do differ, either because the blueprints are not equally accessible, or because such blueprints are not equally and easily put into practice, so that agents need time to adapt to the new rules of the game. There is no doubt, however, that all these rules allow the reproduction of the allegedly ideal system and are to be introduced as quickly as possible. (5)

The normative undertaking of the neoclassical economist is, accordingly, twofold. On the one hand, he tries to export the Nirvana blueprint to all countries that are significantly below their production-possibility frontier, whatever that may mean. Growth, then, becomes the inescapable consequence of transition; hence, the role of the so-called "Western expert" who is to explain and adapt a well-known prototype to an unknown but supposedly easy-to-model reality. Furthermore, he is supposed to suggest suitable aid packages in order to reduce the cost of transition and make transaction costs acceptable. Transition is the name of this experiment in social engineering.

Summing Up the Orthodox Economics of Development and Transition

What has been argued in the previous paragraphs suggests that according to the orthodox view the difference between development and transition economics is a matter of human capital and--in earlier times--infrastructure. Developing countries are those where both these variables are poor, while the problem with transition countries is the past system of centralized planning, which prevented the economy from benefiting from consumer sovereignty and specialization.

In both cases, foreign aid is believed to play a crucial role. In developing economies, it is supposed to encourage education and to speed up investment until a critical threshold is secured, beyond which, growth and development become self-sustained. In transition countries, foreign aid is to soften the adjustment-cost problems that the institutional shocks generate. In addition, it makes a free-market economy acceptable either to the rent-seeking minorities who regarded themselves as better off during the Communist regime, or to those workers who perceive the short-run costs of transition but do not care very much for its long-run benefits.

From a practical viewpoint, the failures of mainstream development and transition economics are apparent. They are apparent, due to their disregard, vis-a-vis, for the institutional framework and the variables that interact with both formal and informal rules and organizations. Transition paths based on exogenous-growth hypotheses were indeed justified from a static viewpoint, because the greater the distance from the ideal blueprint, the greater are the opportunities for catching up. The empirical evidence in this direction has, however, been disappointing, to say the least. Attempts to go back to classical economics and stress the role and the dynamics of factor endowments (be it fixed capital or human capital) did provide answers to some of the neoclassical riddles, but their overall predictive power remained modest. (6)

Can We Escape Bad Economics?

Disillusion with the mainstream approach to growth has encouraged analyses from different angles, and two lines of thought have proved to be particularly popular. One has emphasized the interaction among political players. Another has taken income distribution into consideration.

On the Political-Economy Approach

The aim of political-economy analysis is to explain the manifest contradiction between the availability of allegedly desirable welfare-enhancing prescriptions on the one hand, and, on the other hand, the systematic reluctance--by policy makers and public opinion alike on the other--to follow the supposedly optimal blueprint.

By drawing heavily on public-choice theory, it is argued that the introduction of standard neoclassical blueprints into a previously distorted situation may run against more-or-less powerful pressure groups. Policy-makers are surely vulnerable to particular interests. Hence, although all politicians tend to accept neoclassical prescriptions in theory (for it would be hard to object to a Nirvana state), in fact, they tend to ignore the so-called public interest and engage in ongoing negotiation with the various coalitions so as to preserve their rents and power.

The public-choice addition deserves credit, for it surely fills the gap between positive and normative orthodox theory by showing why good theories are not necessarily put into practice by rational and omniscient policymakers. Nevertheless, the fundamental weaknesses of the orthodox vision persist. Since no theory is put forward regarding the development of social and institutional variables, the enriched mechanics offered by the political-economy approach assumes that the rules of the game are constant and that they can hardly be changed by the agents. This is, of course, a heroic assumption, as a consequence of which, it becomes impossible to clarify the origin of the differences in the rent-seeking, law-making game across the world.

In addition, the dynamics of transaction costs are indeed mentioned to explain the birth of and the interaction among interest groups. But the essence of growth, as a competitive process among different institutional solutions aimed at reducing transaction costs and disequilibria, is systematically disregarded. (7)

On Capitalism with a Human Face

A second line of thought suggests that successful growth recipes can be accepted--and thus meet success--only if distributive issues are taken into account adequately, and if higher income levels correspond to higher living standards, to be measured according to more-or-less sophisticated indicators (such as education, life expectations, and exploitation of child labor).

Yet, social-justice criteria are not likely to produce noteworthy results, unless one provides a satisfactory definition of social justice itself and is ready to accept the concept of society as being distinct from a system of interacting individuals. Unfortunately, the advocates of social justice fail on both accounts. Their (declining) fortune seems to profit more from their implicit promises of redistribution, which justifies social engineering and satisfies envy rather than from their proven ability to foster economic progress overall and/or individual advancement.

As a matter of fact, growth with a human face has been another experiment in free-market constructivism, whereby expert and scholars have tried to solve the public-choice problem (interest-group resistance), preserve the bureaucracies, and overcome the market failures generated by a static free-market theory. In short, growth and development have been transformed into an instrument functional to vaguely defined social-justice policies.

Preliminary Conclusions

As mentioned earlier, by identifying economic progress with the application of a known blueprint, mainstream economics has missed the essence of transition and growth. Instead, these phenomena consist of the development of new blueprints, which, in turn, depend on the existing stock of knowledge and combine the stock of knowledge with the rules of the game and with the individual proclivity to take advantage of the existing opportunities. (8) In this light, transition can still be defined as the change in the rules of the game. Such a change, however, is not necessarily aimed at starting some kind of a mechanical catch-up process, but, rather, at reducing transaction costs and providing better opportunities to meet individual objectives. This has important consequences, since it implies that the issue of transition may clearly apply to the so-called developed world as well, and to Western Europe in particular.

The persistence of missed opportunities in large areas of the West over the last two centuries (9) calls for a deeper investigation of the role of institutions and on the driving forces that have affected the evolution of the rules of the game in Western societies. The approach proposed in these pages is fairly close to that suggested by institutional economists. One substantial difference must be stressed, however. The institutional school investigates institutional development and economic growth as path-dependent processes. These may be influenced by other variables but are, more or less, always set into motion by exogenous shocks. Contrary to that, it is here believed that the effects of historical accidents depend heavily on the cultural features of the societies they fall upon. In other words, the following pages argue that the slow evolution of the patterns of individual behavior--perhaps more aptly defined by Hayek (10) as the "sensory order"--leads to the dynamics of civilizations. This may promote the advancement of the stock of knowledge, as institutional scholars sometimes define it, but may also promote rent-seeking games, as the public-choice school maintains. (11) In turn, the state of civilization explains the need for transition, as well as the chances for transition to take place.

Of course, this does not rule out the possibility of analyzing the evolution of civilizations as self-contained stories that start from historical accidents and develop, flourish, and decline according to a set pattern; (12) for although unquestionably deterministic and rather mechanical, these patterns usually rest on a dynamic theory of development, which may differ among the various authors but, nevertheless, does not suffer from the neoclassical flaws discussed in the sections above. The crucial difference between the view proposed here and the self-contained visions suggested in the literature stems not only from the ambition to use the institutional insights, but also to emphasize the role of the stock of knowledge, of coalition interplay, and to combine vaguely-defined exogenous shocks with cultural change.

On the Origins of Western Behavior

The essential economic-policy question in today's Western Europe can be formulated in two steps, which are related to each other. First, although public opinion is not particularly unhappy with living standards, there exists a prevailing feeling of dissatisfaction. It is believed that Western Europe is producing well-below potential output and that many resources are not allocated efficiently, including the labor force.

Second, there is widespread agreement about what should be done to attain better results--that is, improve the institutional framework. (13) Nevertheless, the demand for better rules of the game has been developing rather slowly. It has gone from a situation when disappointing performance was attributed to lack of governmental intervention along Keynesian guidelines to one where governmental intervention needed to be improved and made more efficient, following technocratic rule, to one where efforts were required to reduce the size of the government machine altogether. Still, the role of government has remained intact, (14) by and large, as the political space for truly free-market parties has remained rather modest.

A Standard Interpretation The general framework summarized above is usually explained in public-choice terms, whereby policymakers are subject to pressure from rent-seeking interest groups. When these are effective enough, they secure rents from politicians even when such rents negatively affect overall welfare and growth. Those who suffer from such rent-seeking activities are too weak to resist pressure or to respond. (15)

Its dynamic version, whereby the amount of rent-seeking is a function of income, surely enhances explanatory power over time and provides a useful theory--say, to understand the expansion of the welfare state in the second half of the twentieth century. The possibility that rent-seeking groups affect the institutional environment is not ruled out, either. However, although they do explain how today's illiberal democracies work. (16) These theories do not even attempt to ask why and how illiberal democracies became so successful. As a consequence, they shed no light on their future developments.

Current explanations also find it increasingly hard to delineate how some categories of coalitions form their objectives, for interest-group members oftentimes deviate from their expected, utility-maximizing behavior. That is clearly the case when consumers express themselves in favor of protectionism, even when the industries to be protected are not those where consumers work. Large numbers of youth (including among the unemployed) do advocate pervasive state legislation and rigid labor markets, even when they do not have access to significant unemployment benefits. Similarly, politicians find it extremely hard to resist pressure from relatively small interest groups (such as farmers) whose requests for subsidies are commonly perceived as harmful to social welfare.

On the Role of the State

It is plausible to claim that individuals generally accept or indeed advocate governmental intervention for three reasons. They might believe that governmental action can at least partially compensate market failures. In this case the state is then required to play an active role as a producer. In addition, the state, instead of individuals, is often asked to intervene and make decisions even when there is no a priori reason to believe that such decisions are preferable to those taken by individuals themselves. In this particular situation, the state relieves the individual from the strains and challenges involved in the decision-making process. Finally, the state may be required to perform a redistribution policy, according to some kind of allegedly agreed-upon social-justice criterion.

Rule of Law

The first set of cases regards the provision of rule-of-law, that is, the quasi-monopoly of violence as a way to guarantee and defend individual liberties against external aggression and domestic turmoil. (17) By and large, this role is accepted as a general principle, but frequent deviations tend to be tolerated whenever rule-of-law obstructs democratically approved redistributive or collective-welfare goals. (18) As a consequence, today's Western societies are not run according to rule-of-law principles but, rather, by following some kind of discretionary legislation, which, of course, leads to--and sustains--the quest for discretionary power.

Personal Responsibilities

Relief from personal responsibilities--the second source of legitimacy for state action--is not only important, per se, but also because it allows people to understand when redistribution and/or collective-welfare policies are more important than rule-of-law. This amounts to saying that the overall attitude of individuals toward state intervention depends crucially on their willingness to take personal responsibility in the decision-making process. Of course, in most cases, this attitude turns out to affect the degree of governmental intervention, rather than being a clear-cut, yes-or-no decision. This is, perhaps, apparent today, when the role of the state beyond law-and-order, personal freedom, and sometimes even constitutional guarantees is taken for granted. (19) It is worth remembering, however, that for most of our (Western) history the crucial decision was not about the optimal amount of state intervention but whether the state was to intervene at all beyond rule-of-law. By and large, in Western civilization, the answer was clearly negative until the end of the eighteenth century. Until then, the boundary could be and was, indeed, encroached upon. However, until some two centuries ago, the incumbent ruler knew that whenever this happened, his legitimacy would be weakened and his power jeopardized. In this light, the crucial question is, now, to realize the mechanisms that led vast layers of the population that decided no longer to be responsible for broad areas of the decision-making process and to delegate the state instead.

Redistribution

The transfer of personal responsibilities is closely associated with the issue of redistribution. This becomes apparent if one observes that redistribution is seldom justified by referring to the principle of transferring income but, rather, to the need to finance governmental intervention according to principles of equity. In other words, fairness is not usually justified by the need to define ex ante the desirable net income (or purchasing power) of each individual, but rather by the need to finance governmental activity according to each individual's capacity to contribute (i.e., tolerance vis-a-vis tax pressure). This leads to the concept whereby the idea of social justice is not deemed to be acceptable, per se, but only as a guideline for expenditure financing, and this concept sheds light on the fact that although direct taxation is clearly progressive, in fact, the net result of governmental action is much closer to neutrality than public opinion is induced to believe. (20)

As is known from the public-choice and institutional literature, redistribution also plays two additional roles. It is the instrument through which social tensions are allegedly softened and through which politicians strive to obtain power. The remaining part of this article is now devoted to these aspects.

A Conjecture on the Evolution of Western Behavior

What, today, are defined as "Western societies" are the result of the Judeo-Christian ethos, as it developed throughout the past twenty centuries, and possibly more. Christian behavioral patterns are far from uniform though Judeo-Christian path-dependent processes were affected by various kinds of shocks in different geographical areas, that is, in different environments. In other words, and in accordance with the institutional literature, each of these major shocks gave way to new path-dependent processes, which shared similar (Judeo-Christian) rules of the game but did not necessarily lead to converging results. The following paragraphs try to clarify some basic patterns in this evolution, and to draw some conclusions corresponding to today's world.

The West Until the Twelfth Century

For the purpose of the present analysis, the key fracture of the paleo-Christian ethos with the pagan world is twofold: its vision of risk and its concept of individualism. Risk, in the classical world, meant discovering the unknown and challenging--sometimes even trying to influence--destiny. Contrary to what seems obvious today, in the pre-Christian period the acquisition of knowledge was understood to be the moral duty of the individual, in order to prove his superior nature as a human being and his right to citizenship, that is, to his becoming a member of the community. Defying the gods would expose people to wrath and punishment, but it was not regarded as socially or morally disgraceful--at most--just foolish, for the individual was perceived as the lowest layer of a continuum of more or less powerful divinities, from Zeus down to semi-gods such as Hercules, or supermen such as Achilles. Religion, as understood in the Christian era, was out of the question.

Surely, the acquisition of civic dignity concerned a relatively small number of people, that is, those for whom making ends meet was not the foremost daily problem. It is important to note, however, that those who could care about the acquisition of knowledge were not particularly interested in enhancing their own material welfare. The elites were already enjoying substantial rents, their time horizon was relatively limited, transaction costs, in general, were too high to justify "research and development," and rights on intellectual property were hard to enforce. If anything, scarcity could be overcome by robbing or enslaving the neighbors rather than by working harder or finding new ways of production. It is no accident that warriors came after "philosophers" in the social scale but well-ahead of workers. Finally, there was, of course, limited interest in enhancing the collective well-being of society as a whole, both because of relatively modest concerns for the poor and--more important--because the existing distribution of political power and of economic rents could have easily been perturbed by a different distribution of wealth. The bottom line was that the dynamics of institutions tended to be much more responsive to the need of politics than of economic betterment. (21)

Within this framework, as from the fourth century, the Christian message had an immense effect and drastically changed the rules of the game. (22) In the classical world--which, in this context, started to decline already before the Jugurthine wars--social status was the reward of a painstaking process of individual discovery, whereby risk and uncertainty were not eliminated but acted as the instrument through which a man would acquire maturity and become a full member of the community. Being able to challenge uncertainty was more relevant than being able to reduce it.

On the contrary, in the Christian world, dignity was a built-in feature of the human being, lost with Original Sin but partially regained through baptism. The institutional consequences of this vision can be hardly overestimated, for the Christian concept of individual dignity succeeded where the Roman Empire had failed. On the one hand, by guaranteeing equal rights to all Christians, (23) it enabled the Western world of the time to absorb the Volkerwanderung and successfully resist Islamic invasion. Second, Christendom provided social cohesion and a fundamental path-dependence rule, by giving the Church the power to guarantee legitimacy to rulers, ruling elites, and feudal institutions. (24) Social cohesion came from the strikingly strong bond between religious norms, Church authority, and secular power. Path dependence and predictability were generated by the increasingly high costs of staying out of such a social system, that is, of being non-Christian. Incumbent rulers would have had weak legitimacy and been more exposed to domestic uprisings or to foreign aggression legitimized on religious grounds. Economic agents would have also been damaged by not accepting the rules of the game enforced by the Church, since lack of religious sanctions would have led to even less-enforceable contracts. Indeed, it is no accident that, for a long period in Western European history, financial transactions could take place only because of religious guarantees.

In other words, starting from the fourth century, the Western world evolved according to a path-dependent process rooted in the Christian concept of the individual. This led to the birth of two powerful interest groups. One was the Church itself, which acted to enforce the established notion of the individual. The second was the individual himself who was worthy of human dignity only as long as he belonged to a recognized social group, did not strive for social mobility, and gave up his will and power to acquire knowledge through a speculative process, or wealth through entrepreneurial activities. Clearly, efforts to acquire new knowledge and entrepreneurship would have been a realistic threat to the Christian notion of a tolerant and subdued individual, and thus to the existing social order.

Individualism Between the Twelfth and the Eighteenth Centuries

The pre-Christian concept had survived in some parts of Europe, especially in those at the margin of the Volkerwanderung, where the influence of the Church was substantially weaker. (25) Nevertheless, until early 1200 A.D. there was no doubt that the theology of the Original Sin had cancelled all ambitions to conceive the individual as an agent willing to improve his status and experiment with new venues. The ubi sunt teachings reinforced the widespread persuasion whereby the soul had been contaminated by Original Sin and encapsulated into dirty material spoils. The only way to acquire human dignity again was through repentance and humiliation of the soul and of the flesh. From a social viewpoint, the search for a group to belong to was far more important than the search for the individual.

This view started to be questioned at the beginning of the twelfth century and eventually led to the birth of the present subjectivistic concept of the individual. The coming to maturity of hereditary feudalism--a system initiated by the military requirements of the time (26)--was probably one of the key events that explain a crucial change in attitude. Feudalism gave rise to a new decentralized political structure, and the king was, by and large, transformed into little more than the president of a loose federation of local lords. This expanded dramatically the need for trained scholars and intellectuals, hired by feudal lords and by kings alike, to enhance and legitimize their patrons' position against rival secular power and also to counteract unwarranted encroachment by the Church. Universities were thus created. Scholars were indeed almost invariably educated by religious faculty, but they often found a career in the secular world, where a new elite of entrepreneurs was being born out of the city economy: the merchants. Intellectually trained (and loyal) people started to become a political resource for the rulers. Put differently, a new elite, based on personal qualities, started to come to the surface. Education and intellectual abilities became an asset and a reason for pride rather than for a sinful activity and a source of heresy.

There is no doubt that, at the beginning, the change affected only the elites. The vast majority of the population had other, vitally more important, things to attend to than individualism. However, in the following three centuries the world changed radically. Religious terror intensified individual tensions and anxiety, but obsession with sin and the virtual certainty of hell (27) encouraged people to pay more attention to the joys of life. The introduction of purgatory and confession forced individuals to look at sin as a private responsibility rather than as an objective burden. (28) Black Death made labor scarce and stimulated people to perceive their worth as human capital. The expansion of the geographical horizons of the time created new opportunities for trade and-more important--made it possible for the new entrepreneurial class to emerge. (29) Sin was no longer the central element regulating individual behavior, social relations, and political structures. Instead, humanism accompanied and, in some cases, even replaced the ethics of fear and submission.

New economic opportunities and a growing perception of the human being as an individual led to a new ethics that was often against Catholic principles but found a (slightly) more favorable religious environment in the Reformation. (30) In short, humanism was a method to appraise and evaluate the real world. Although addressed to the educated elites only, in fact, it trickled down to almost all layers of the population and became the Weltanschauung that allowed the Western world to start its growth process, as we know it today. It justified and encouraged scientific research, originality, free trade, and the establishment of rule-of-law even vis-a-vis non-Christians. (31)

Individualism After the French Revolution

Surely, the humanist method and vision that shaped Western civilization as from the sixteenth century was not consistently accepted. Its logical policy implications were often overlooked. Free trade was not always the rule; tolerance was far from widespread, and nationalism gradually came to the surface. Science was also regarded with suspicion in many reformed countries, as well. Rent seeking increased as the cost of coercion fell, and nonencompassing interest groups became more pervasive and powerful, including the bureaucracy and the ability of governments to tax and thus increase--among other things--warfare. Growth prospects were obviously harmed.

Humanist principles began to decline in continental Europe following the French Revolution (they eventually collapsed with World War I). On the one hand, at the end of the seventeenth century the ability of the French administration to tax allowed a much-weakened king to raise an army of nearly one million soldiers, (32) which, in a few weeks, defeated the three major military powers of the time, combined. This, undoubtedly, contributed to create a view of power that was no longer perceived as the outcome of divine will but, rather, as the result of the people's unity and might, of the national resolve. That is, the notion of a collective will was about to replace humanist subjectivism.

On the other hand, by achieving absolute monarchy and absorbing the Enlightenment--itself an offspring of humanism--the Western world found itself in a vacuum, for the legitimate claim of the monarchy to command a huge amount of power was no longer acknowledged. The fight for power could have begun any moment. In fact, it started where absolutism was greater and the monarch weaker. The French Revolution did not destroy power. It simply transferred it, from a weak monarch to a new class of ruthless rulers, sometimes the leaders of democratically elected assemblies, sometimes just the (totalitarian) self-appointed leaders of the nation.

The aftermath of the French Revolution has been explained--among others--by de Jouvenel (33) and de Jasay. (34) Democratic legitimacy changed the political rules of the game, and the new rules gradually affected individual behavior and attitudes. The notions of common will and of common welfare acquired a clearer and clearer meaning in continental Europe. The degree to which the common will could encroach on the individual became a matter of degree, surely not of principle. The crucial novelty that became manifest during the French Revolution was nothing else than the struggle for the power secured by the late eighteenth-century state.

Since then, it has absorbed increasing amounts of energies and resources. At the same time and because of it, the gradual rise in the ability to exercise discretionary power by means of (illiberal) democratic rules has raised the desire for security rather than for individual freedom. For obvious reasons, this phenomenon became even more acute after World War I and the crisis in the 1930s.

Toward a New Approach to Transition

Consistent with the institutional tenet, the previous section suggests that Western Europe experienced four major path-dependent processes in the Christian era. One refers to the period during which institutions were driven by the political need for expansion and conquest in order to protect borders, secure more slaves and agricultural resources, and appease domestic interest groups. When that process broke down, a new one became manifest in the early Middle Ages and was characterized by the dynamics of Church power. A third came to the surface when the humanist entrepreneur prevailed and gave birth to the Renaissance. The final stage appeared in the aftermath of the French Revolution, when entrepreneurship, rule-of-law, and individualism had to come to terms with rapidly expanding democratic systems.

There is no doubt that the description of the path-dependent processes that have characterized the Western world surely deserve much closer investigation and detailed study, from institutional, religious, and political standpoints. Nevertheless, the distinctive features, although liable to further testing, are clear enough. On the contrary, it is not at all clear whether change from one path-dependent process to another is entirely accidental, as the institutional school maintains.

From One Process to the Other

Borrowing in part from Quigley, (35) it is here claimed that path-dependent processes give rise to public-choice mechanisms that involve political as well as economic pressure groups. In turn, the relative weight of the economic and political variables depend on the rules of the path-dependent game and on the transaction costs that characterize both sets of activities. The role of exogenous factors cannot be excluded. Contrary to the institutional view, however, it is here argued that such shocks do affect the timing and sometimes also the features of the institutional breaks but not their necessity; that is, the fact that sooner or later a given path-dependent process breaks down.

This can be observed during the first period considered above. As the Roman Empire expanded geographically and more resources were needed to support its administrative and military structure, rent seeking became increasingly appealing and the burden on the population became less tolerable. Loyalty to the emperor was no longer justified by the half-sacred notion of Roman citizenship, or by the allegedly semi-divine nature of the emperor. The incumbent political structure had to find new ways to enhance its legitimacy. Christendom and the Church were the answer. Put differently, Christendom was not a shock. Rather, it turned out to be the result of an institutional selection process among the various religious options available at the time. As we know, in the end, this choice was not enough to save the (Western) empire, but it did start the new path-dependent process.

The crossing from the early Middle Ages to the humanist process presented similar features. The rules of the game dictated by church power and, in particular, the amount of taxation required to sustain it, turned out to be unsuitable to a new emerging class of (entrepreneurial) individuals. A new ethics and new religious beliefs took over, a new behavioral process was set into motion, within Catholic milieus, too. The Church survived, of course, and continued to play an important role. In Nietzsche's words, the Church was actually saved by Luther. Richelieu and Mazarin would have been unthinkable without the Counter-Reformation, but as from the middle sixteenth century, the role of the Church in the leading areas of Western Europe changed significantly with respect to previous times.

As time went by, the new entrepreneurial class learned about the benefits of rent seeking. Protectionism gradually crept in. Mercantilist attitudes in the name of the monarch or of the guild became more and more frequent and, of course, contributed to enhancing the power of the central government and weakened resistance to its action. Colbert was surely no exception in sixteenth-century Europe. Pohl (36) quite aptly reminds us that mercantilism did not always mean the same thing everywhere and did not always lead to the same type of clashes. Nevertheless, where and when the amount of centralized power became large enough, and the Church weak enough, the race for power in the name of the people began. New rules of the game were thus established or imposed. Restoration did not turn the clock back. It just made clear that power was contestable and incumbent rulers hesitant to cultivate the notion of the collective will and to attend to it could be overthrown by new leaders.

On Transition Once More

In light of the preceding discussion, transition might now seem to be little more than an empty term. On the one hand, it is hard to maintain that there exists a period of time during which the old path-dependent process is finished but the new one has not yet started. The fact that we are not able to see what the new process consists of does not mean that the new process is absent. In fact, it may happen that the new rules go together with old rules, and that different layers of the populations move at different speeds, according to the different rules. Stated differently, the key argument here is that societies seldom change their path-dependence process overnight. When this is the case, civil war and bloodshed are the outcome, especially when minorities try to eliminate majorities.

On the other hand, transition might be used to describe and analyze what happens to an economy (or a more-or-less-defined social structure) when the interplay of rent-seeking coalitions ends up generating a path-dependent process, eventually leading or contributing to its downfall. (37) In this light, transition would become some kind of a dynamic, public-choice investigation. Though acceptable, however, this notion of transition would probably not be of great use, either. After all, the terms of the rent-seeking game change continuously whenever coalitions are allowed to interact. In other words, all countries are almost always in transition unless a totalitarian regime stops rival pressure groups from coming to the surface. (38)

In short, looking for new or emerging models of economic activity may be an interesting speculative exercise but unlikely to be of great use unless one understands how those models are going to be incorporated in actual economic activity and give birth to new assignments of property rights. For example, it is widely thought that today's Western economies are following a free-market pattern and that East-European countries have accepted such a model to shape their own economic institutions. Yet, a quick look at the data on the size of the governmental sector, of taxation, of regulation, or at the respect for rule-of-law should make it clear to anybody that the Western world today is not at all near the free-market paradigm and that Eastern European leaders do not actually pursue free-market models. Indeed, in both cases the political elites would easily lose consensus if they were to act otherwise.

The Role of the Individual

The analysis presented in the previous pages suggests a perhaps more promising avenue to evaluate the nature and the stage of current path-dependent processes. Since societies are shaped, or at least, influenced by groups of individuals, it seems reasonable to pay special attention to the way in which individual preferences evolve. In this respect, de Jouvenel (39) already pointed out that, in the modern world, freedom is a secondary need. Security comes first. That is a crucial statement with two important consequences. First, rent-seeking activities are to be expected whenever there is a possibility of extracting rents or of engaging in law-making negotiations even if rents are to paid and the net gain turns out to be close to zero or even negative. In fact, the purpose of rent seeking is not just to appropriate rents (which have to be bought, anyway) but, rather, to acquire stability and thus, reduce competitive pressures.

Second, one who promises stability, even without significant redistribution, will always defeat a leader who promises freedom. This does not necessarily mean that freedom is irrelevant. It does imply though, that freedom becomes a relevant issue only when stability is guaranteed. In a stable society, freedom may be more important than additional stability but becomes a questionable target if accompanied by less security. This concept can also be rather easily extended to the role of ideology, for a socializing ideology can be highly effective in creating political support, since it promises security within a large social group. (40) Whereas, an ideology enhancing individual freedom and protection against social infringements is more likely to meet failure. By delegitimizing the notion of society or coalitions as political entities prevailing on personal interests, individuals feel more vulnerable. In this light, freedom or personal economic interest, in the neoclassical sense, become marginal issues.

Therefore, it seems that the change in the rules of the game in today's allegedly free-market societies is to be considered a cultural issue rather than a mere technical one. If so, transition should then be concerned with the change in individual perceptions, preferences, and attitudes, both in Western economies and in the East-European areas. In other parts of the world--say, formerly Soviet Central-Asian countries--change in individual attitudes may even regard other moral values and systems. In these situations, the assignment and enforcement of property rights according to an ideal free-market model may not only be less than acceptable but just inconceivable.

Hence, the chances of experiencing transition in the Western world are at least as relevant as those typical for East-European countries, where the new moral codes cannot be appreciated and perhaps understood before a new generation, possibly two, have gone by. If anything, the analysis of the Western case may be closer to our possibilities. What makes it interesting from a subjective viewpoint is that security is, by and large, taken for granted, while faith in the virtues of social engineering, which, to a large extent is supported by the myth of the collective will, is vanishing. Whether we are on the point of a humanist comeback, however, remains an open question.

Enrico Colombatto

Professor of Economics

Universita di Torino, and International Centre for Economic Research

Turin, Italy

Notes

(1.) Among other things, this latter element contributes to explain why the Western world started to grow significantly only since the second half of the fifteenth century, that is, after the Portuguese introduced the caravel, which enhanced exploration and allowed relatively safe and cheap, long-distance commercial transportation. See P. Hugill, World Trade Since 1431 (Baltimore and London: Johns Hopkins University Press, 1993).

(2.) Whether such policies are also effective is, of course, another matter, still open to doubt. See, for instance, F. Rodriguez and D. Rodrik, "Trade Policy and Economic Growth: A Skeptic's Guide to Cross-National Evidence," discussion paper, CEPR, n. 2143, May 1999.

(3.) Until a few decades ago, these requirements were thought to be a minimum amount of income, so that at least some resources would be available for investment including infrastructure. Clearly, the features and size of today's world capital markets make such minimum standards virtually irrelevant.

(4.) G. Hodgson, "What Is the Essence of Institutional Economics?" Journal of Economic Issues 34, no. 2 (June 2000): 317-29.

(5.) J. Winiecki, "Formal and Informal Rules in Post-Communist Transition," Journal of Public Finance and Public Choice 16, no. 1 (1998): 3-26.

(6.) See M. Olson, "Big Bills Left on the Sidewalk: Why Some Nations Are Rich and Others Poor," Journal of Economic Perspectives 10, no. 2 (Spring 1996): 3-24; and K. Arrow, "The Economic Implications of Learning By Doing," Review of Economic Studies (1962); 155-73, for a synthesis of the orthodox view, which includes both classical and neoclassical elements.

(7.) See A. Alchian, "Uncertainty, Evolution, and Economic Theory," Journal of Political Economy 58, no. 3 (1950): 211-21, and D. North, "Economic Performance Through Time," American Economic Review 84, no. 3 (June 1994): 359-68.

(8.) D. North, "Big Bang Transformation of Economic Systems: An Introductory Note," Journal of Institutional and Theoretical Economics 156, no. 1 (March 2000) 3-8; E. Colombatto, "Is There an Austrian Approach to Transition?" Review of Austrian Economics, forthcoming.

(9.) A. Maddison, Monitoring the World Economy 1820-1992 (Paris: OECD Development Centre, 1995).

(10.) F. Hayek, The Sensory Order (Chicago: Chicago University Press, 1952).

(11.) This is also the essence of the (old) view of institutional economics, as held by Veblen and Common. See Hodgson, "What Is the Essence?" 326.

(12.) C. Quigley, The Evolution of Civilizations (1961; reprint, Indianapolis: Liberty Fund, 1979).

(13.) It is worth emphasizing that overall agreement has also been reached as for what should be done in detail. This regards the need for a drastic reduction in the role of the state, better protection of property rights and of contractual, voluntary agreements. These are indeed the core features of a capitalist system.

(14.) Some window dressing has taken place, however. For instance, direct state management has been replaced by regulation; centers of power have moved away from national capitals to a federal center; privatization policies have been carried through, although driven by urgent needs for cash; rather than by solid free-market beliefs.

(15.) As is known, a reaction vis-a-vis rent-seeking groups is made more difficult by the rules of the political game, whereby issues are seldom discussed and voted upon by the population one at a time. Instead, they are generally bundled together in rather vague terms or programs once every four or five years. The electorate hardly knows what the vote is about, and the policymakers succeed in hiding behind fairly high information costs and, thus, low accountability. It is not surprising that the emotional effect of a charismatic leader may become far more important than his political record as a reformer or as a promoter of rule-of-law and efficiency.

(16.) See F. Zakaria, "The Rise of Illiberal Democracy," Foreign Affairs (November/December 1977): 22-43, who uses the term illiberal to denote the violations of individual liberties that normally take place in today's modern democracies.

(17.) The argument whereby governmental intervention is supposed to secure competitive conditions is a much more recent phenomenon, which derives from the neoclassical idea of static competition and the need for welfare-optimizing microeconomic policies. These issues will, however, be neglected. Although the role of the state as a neutral welfare maximizer still dominates the political debate, there is now widespread agreement on the flaws of the Marshallian idea of competition as opposed to its dynamic (Austrian) version.

(18.) Redistribution and collective welfare differ in one important respect. Redistribution aims at transferring purchasing power from one set of individuals to others, while collective-welfare action plans to provide public financing and, sometimes, public production of selected services, e.g., education, health, and social security. Such plans may imply income transfers to the poor, but not necessarily. Indeed, in many cases, the rich benefit from these programs to a larger extent than do the poor.

(19.) "If the personal freedoms guaranteed by the Constitution inhibit the government's ability to govern the people, we should look to limit those guarantees" (President William J. Clinton, August 12, 1993).

(20.) This has another important implication for it explains why redistributive policies are limited to the national boundaries of the state. Indeed, if Western societies really shared an ideal of social justice--whatever that may mean--there would be no doubt about the most deserving beneficiaries of the transfers, that is, the populations of the low-income countries, where even modest amounts of money make the difference between life and death. Yet, these kinds of transfers are only a minor part of the state budget.

(21.) See E. Kaufer, "The Evolution of Governance Structures: Entrepreneurs and Corporations," Journal of Institutional and Theoretical Economics 152, no. 1 (March 1996): 7-29, who also points out that private initiative was, however, held in some esteem in the classical world, for slaves could acquire freedom through their labor and efforts. As thinkers, as wide apart as Sieyes and Rousseau, recognized centuries later, however, slavery and--more generally--a class society with different political rights, was an indispensable element to explain the concept of freedom in the classical world.

(22.) The emphasis on the fourth century is important for in that period Christendom acquired political prerogatives and ceased to be just a Middle-Eastern sect stemming out of the Jewish tradition. The doctrinal aspects evolved accordingly. See, for instance, the brutal solution to the Pelagian dispute (early fifth century) or the new significance attributed to baptism. Contrary to its paleo-Christian meaning, whereby baptism signified the sacrifice and resurrection of Christ, as from the fourth century this sacrament identified freedom from Original Sin.

Of course, this comment calls for another important question. One may indeed wonder why the turn in the secular significance of Christendom took place in the fourth century and not at a different moment in history. Although this would lead us well beyond the scope of these pages, the approach in this article suggests that the answer lies with the Volkerwanderung itself, which put pressure on the military structure of the Western empire, disrupted its organization, led to increased taxation and stronger local rent-seeking positions, and ultimately delegitimized imperial authority.

(23.) Of course, that does not mean that all were treated as equals. It does mean that people could not legitimately be discriminated against because of their inferior personal dignity. Put differently, individual dignity was something that could be lost, mainly by means of sin.

(24.) This is something that the Roman emperors perceived relatively quickly, and that led them to encourage the diffusion of Christendom and, eventually, to adopt it as the State religion. Barbarian rulers followed quickly. Clovis, for instance, was christened as early as 493 A.D., less than twenty years after the fall of the western Roman empire.

(25.) A. Gurevich, The Origin of European Individualism (Oxford: Blackwell, 1995).

(26.) As is known, feudalism originated at the end of the ninth century, as a response to the military facing the Empire from the south (Islam), from the north (Normans), and from the east (Magyars). As recalled by Kaufer, "The Evolution of Government Structures," another decisive element was the introduction of the heavy plow, which led to the village economy (and later, to the cities).

(27.) J. Delumeau, Le Peche et la Peur La Peur Le Culpabilisation en Occident, XIII-XVIII Siecles (Paris: Fayard, 1983).

(28.) Abelard had come close to heresy for having said something similar at the beginning of the twelfth century.

(29.) Of course, the incentives for a better enforcement of property rights strengthened. Success in this direction led to new entrepreneurship. See also C. Jones, "Was an Industrial Revolution Inevitable? Economic Growth Over a Very Long Run," working paper, NBER, n. 7375, October 1999, for an attempt to quantify parts of this mechanism.

(30.) The Weberian view of the causal link between the Reformation and economic progress is now widely rejected. In fact, previous reform movements failed because they came too early and did not find fertile enough ground in the ethics of the individual of the time. That is, pre-Lutheran movements were not satisfying the demand for a new version of Christendom. There is, however, no doubt that substantial support also came from the exceedingly high taxation by the Church, which reached unprecedented peaks in the early sixteenth century and led to widespread resentment across all layers of the German population.

(31.) See B. Krug, "On Custom in Economics: The Care of Humanism and Trade Regimes," Journal of Institutional and Trade Economics 155, no. 3 (September 1999): 406-28.

(32.) Before the French Revolution, a large European army numbered about one hundred thousand soldiers.

(33.) B. de Jouvenal, Du Pouvior: Historie Naturelle de la Croissance (1945; reprint, Indianapolis: Liberty Fund, 1993).

(34.) A. de Jasay, The State (1985; reprint, Indianapolis: Liberty Fund, 1998).

(35.) C. Quigley, The Evolution of Civilizations (Indianapolis: Liberty Fund, 1979).

(36.) H. Pohl, "Economic Powers and Political Powers in Early Modern Europe: Theory and History," Journal of European Economic History 1 (Spring 1999): 139-68.

(37.) This pattern was already proposed in Quigley, The Evolution of Civilization, who analyzed at great length the rise and fall of a number of civilizations. These pages suggest that the same paradigm could be used to analyze path-dependent processes within Western civilization over the last two thousand years.

(38.) This is actually what happened under the Soviet regime in Eastern Europe and still occurs today in many undeveloped countries.

(39.) de Jouvenel, Du Pouvoir, chap. 18.

(40.) G. Miller, "Coalitional Instability, and Institutional Transformation," Journal of Institutional and Theoretical Economics 154, no. 4 (December 1998): 764-73.